The 2018 California Wildfire Season would be remembered as the State’s deadliest and most destructive wildfire on record yet. The California Department of Forestry and Fire Protection (CalFire) and the National Interagency Fire Center or NIFC estimated that the incident affected some 1.9 million acres of property. Insurance claims reached 12 Billion Dollars while fire suppression costs reported by CalFire would run a tab of 432 Million Dollars. The sad part is that at least 85 lives were lost, while 18,000 structures were estimated to have been damaged or completely reduced to a cinder – a lot of these, family homes. Due to the severity of the situation, the Government declared it a national disaster.
The inferno started in the northern part of California sometime in mid-July of 2018. Adverse wind conditions triggered other fires making it cross the state onto the Los Angeles and Ventura Counties and later to be known as the Woolsey Fire. It started at an industrial research and development complex owned by an aerospace company, Boeing. That same day, the Santa Ana winds would push the flames southwards to the rugged Santa Monica Mountains and down towards the chaparral-covered canyons, home to the rich and famous, not to mention the renowned movie and TV sets, and small ranches. The fire spared no Malibu home at any particular side of the Pacific Coast Highway.
Jefferson “Zuma Jay” Wagner, his nickname taken from the name of a surf shop he owns and operated since 1975, is a well-known local resident. Prior to his stint as City Council Member and thereafter Mayor, he worked as a stuntman, explosives consultant, model, and once-upon-a-time “Marlboro Man”. What put him on the map of the City though, is his staunch advocacy of environmental causes, specifically that of protecting and preserving the natural landscapes of Malibu. Where once he was investigated for residency issues in relation to his eligibility to serve in the Council, he owns a condominium in the City aside from his luxury home perched atop a mountainside above the Escondido Canyon.
In later interviews, he mentioned regretting not saving up enough for his retirement years and that his home was pretty much what he worked for most of his life. So it was not a surprise that at the height of the Woolsey Fire, Jefferson battled tooth and nail for every square foot of his home. A battle that he would eventually lose and barely escape with his life. While attempting to douse the fire with a garden hose, a section of the roof would come down on him and knock him semi-unconscious. He did manage to crawl to safety after coming to. He would spend some days in the Intensive Care Unit (ICU) of UCLA Medical Center for damage to his internal organs resulting from Carbon Monoxide poisoning.
Much Ado Over Insurance
What is Insurance? To the unbeliever or simply the uninformed, it could very well be an extra expense that we could all do without. Money intended for that may be used to get groceries, buy movie tickets, or purchase that new set of tires for the daily driver. The point is, Insurance, at the onset, can be seen as just a flimsy piece of paper. Accountants call it an “intangible asset” or something unseen, that cannot be touched or held. Frankly, that is all true. At the onset, it may appear useless, a burden even, due to the added cost and strain on the household budget. However, those who know otherwise look at it another way. In fact, they look a long way off into the future. A contingency plan is how the planners see it, or some would say just being ready for the unexpected or the unfortunate instances. Simply put, others would have it as a way of buying “peace of mind” against the “what ifs?” of life.
Investopedia describes insurance as a “hedge” or a protective barrier against financial losses that may result from the loss, damage, or injury. Mostly, this would come from unforeseen events that are unfortunate in nature. An insurance contract, represented by a policy on paper, assures an adversely affected party a certain extent of financial protection or remuneration coming from the insurance company.
Like, say, in the case of the Woolsey fire, adequate insurance coverage will pay for the cost of rebuilding a lost or damaged home up to the extent of the amount specified in the policy. And in certain cases, also provide for the replacement of items previously found inside the burnt house. There are many types of insurance that guarantee protection from any peril or risk one can think of. However, the most common forms are life, health, vehicle, and home protection.
As mentioned earlier, insurance coverage is basically a contract between an insured party and an insurer, which typically is a business entity. It is important to know how it works and that this kind of contract comes with essential components that make up the entire policy. These include 1) Premium or the amount to be paid by the insured that is more often than not a monthly payment. The amount differs depending on the amount of risk gauged by the insurer based on what is called a “risk profile” and creditworthiness. In short, say an insured gets a policy to cover for health or illness, the amount of risk would be translated by how healthy the person is and maybe connected with age, lifestyle, and current physical condition. Whereas an older gentleman with a visibly unsteady gait would be assessed a higher premium versus that of an athletic 24-year-old male that is in peak health physical condition.
2) Policy Limit or the maximum amount the insurance company will pay out to an insured to cover for a loss, damage, or injury. The amount is determined mostly by the number of premiums being paid and the duration by which such payments are made. In Life Insurance parlance, the policy limit is synonymous with the Face Value of the policy or the amount to be claimed in the event of the demise of the insured individual.
3) Deductible, or the amount to be shelled out by an insured, representing his out-of-pocket share prior to receiving a claim. This also acts as a protection or deterrent for unnecessary and frequent “small claims” from the policy. Typically, coverage with a high deductible will come with cheaper premiums and vice versa.
Insurance for High-Value Homes
There are typical American houses of the average hard-working Joe or Jane, and there are mansions of the rich and famous that are of higher value, to say the least. Where the common spread includes 3 bedrooms, 2 baths, 2 car garage, and a quaint little backyard for Sunday barbecue, there on the other side of the coin are palatial houses with 10 bedrooms, 20 carports, indoor pool with jacuzzi, a Roman garden, a tennis court for the wife and a full basketball court for the husband.
Regardless of the size and grandeur of the home, both a simple house and a grand mansion are not impervious to accidents, calamities, or catastrophes. Do both kinds need home insurance? Yes. Can both be covered by the same form of insurance? Well, yes and no. Yes, they can be covered by insurance but there is an extent to the amount of the policy coverage vis-a-vis the financial value of the home. No, because it will be a waste if a claim will not be enough to rebuild a luxury home and repurchase the valuables, should tragedy strike.
This is where High-Value Home Insurance comes in. It provides better coverage for structures that have higher-than-usual value, not to mention furniture and fixtures that are a little out of the league of the average-income homeowner. A good example would be a heritage house built say a hundred years ago, where the materials used in its construction are not easily sourced these days. Furniture and fixtures inside could very well be antiques, where their makers are no longer around.
The same goes for a home with special features made especially for the particular homeowner like say for the whim of a celebrity. The design elements and construction method are not done in your typical Bob the Builder approach and require a specialized team, with specialized tools, and using specialized materials. So in the event of damage or loss, there will be quite a challenge, financially and effort-wise replicating the said house. So it is more than wise for a homeowner to not just stop at designing and constructing a dream home. An equal effort must also be exerted in ensuring that the investment in time and money will not be all for naught should misfortune happen. Choosing the best High-Value Insurance will save the homeowner from a grand and palatial headache.
The typical coverage of High-Value Home Insurance include, of course, “Dwelling” that provides protection for the main home; “Other Structure” that takes care of secondary buildings like sheds, garages, gazebo, even bounding fences; “Personal Property” which covers the personal belongings of the homeowner; and “Personal Liability” for instances where the policyholder may answer for liabilities due to injuries and damage to property of third parties.
Added coverage, where some may appear intriguing, encompass the following self-explanatory provisions: Flood, Kidnap and Ransom, Vacation Home coverage, Rebuilding to Code, Refrigerated Food, Sewer Backup, and Living Expenses – this last provision pays for costs relating to temporary relocation or housing while the main house is being reconstructed.
Typical Home Insurance may also include these but at a steep added premium payment, whereas with High-Value Home Insurance, these come as relatively standard. Hands down, a high-value homeowner is better off securing the latter, as the additional coverage is definitely worth the added cost.
How much Does High-Value Home Insurance Cost?
For starters, the Insurance Industry does not have a clear-cut formula in determining whether or not a home qualifies for High-Value Insurance. The current ballpark figure of actual homes insured in the said category range from $750,000 to about $1.5 million. There are insurance policies however that qualify as High Value but the home value comes up to $300 thousand only.
The valuation method does vary from insurer to insurer and would usually hinge on multiple rating measures. The first step would be for a physical visit from an adjuster or appraiser to make an inventory and assessment of the home, its structure, and contents. Next to be considered are the risk factors that could be geographical and or circumstantial in nature.
The first consideration is the value of the home. The common misconception is looking at market prices, which is ideal if one is looking at reselling. However, insurers would look at the cost of rebuilding and refurbishing a home to its former glory, if tragedy does strike and destroy the home. It is further assumed that the materials used and finish quality are similar if not better. Whereas market prices tend to go up and down based on economics and real estate trends, insurance value takes on a slow upward movement coinciding with inflationary factors affecting construction materials.
Another determinant is location, as each state has its own set of laws and regulations, weather patterns, including fire and earthquake history, proximity to bodies of water, and even crime rates. Across the United States, Luxury Home Insurance ranges from $0.03 per $100 of insured value to $0.95 per $100. So a $2 million dollar home, with an attached $400 thousand secondary structure, and with furniture and fixtures valued at $1 million, will translate to an insured value of $3,400,000. Say, the location of the home is in Suffolk, New York with an average cost of $0.18 per $100, the cost per year will come up to $6,120 representing the insurance premium. There are areas where an insurer gives additional discounts provided that your home construction is LEEDS-certified. LEEDS stands for Leadership in Energy and Environmental Design and where the buildings constructed are environmentally sound, in terms of sustainability, water efficiency, energy and atmosphere-friendly, and the like.
A final consideration for the cost and valuation of High-Value Home Insurance is the 80% rule. This is where an insurer will only allow full claims against the cost of damage or loss of house and property if the insurance coverage secured by the homeowner comes up to at least 80% of the total replacement or reconstruction value. This means that if the insurance coverage paid for falls below the 80% threshold, chances are a claimant may only receive a fraction of the claim. For example, a home with a replacement value of $1 million, and where the insurance coverage is only $700,000, but then fire damage runs up to $500 thousand. In this scenario, since the home is only insured for 70% of the replacement value, this figure will then be divided by the 80% value (700,000/800,000=0.875) which is only 87.5%, this then applies to the damage cost to be claimed of $500 thousand and translates to a claim of only $437,500. Leaving the homeowner to shoulder the balance of $62,500.
More than a year after the fire wiped out a multitude of Malibu luxury homes, fire victim and City Council Member Mr. Jefferson “Zuma Jay” Wagner, inching closer to 70 years old, maintains that one of his biggest regrets is not securing his impending retirement years. He only had his Malibu home as his closest “retirement kitty”. Working as a model in the 1990’s he would take home as much as $3,000 daily from his various gigs, on top of his earnings as a Hollywood consultant on firearms and explosives handling and of course, from his bread and butter Zuma Jay Surf Shop.
Insurance advisers would often advise young professionals to look at insurance and savings from the point of view of not their present happy-go-lucky selves, but from the eyes of their older retired selves, in years to come. Relatively, the extra expense for a good home insurance policy is not intended to short-change your present home beautification or improvement budget, but will only beef up the sense of security of having a nice home for the long term.
Another common concern of advisers is homeowners not buying enough coverage, effectively gambling with fate, and risking losing something they worked so hard for. Thinking that saving a buck and skipping out on essential coverage works for their advantage in the now, not knowing that grinding out a few dollars might translate to thousands of dollars of coverage and claims in the probable future. As Murphy’s Law so bluntly states, “Anything that can go wrong will go wrong”. So it’s always best to prepare for the worst-case scenario, especially for one’s family home.
In 2017, the California Insurance Commission noted a stark reality when it comes to Home Insurance. Up to 70% of victims found out the hard way that they were underinsured by an average of $317,000. So naturally, the discrepancy would have to come out of their own pockets in order to rebuild their homes and resume their normal lives. Besides the realization that most of their possessions were lost and have come to terms with the ensuing trauma, the victims also had to come face to face with the fact that the insurance coverage they thought would be their saving grace turns out to be inadequate. So comes the tough decision to dig into savings or borrow more money. All this could have been easily avoided with diligent scrutiny of the insurance policy and probably a once-a-year policy review.
To date, a handful of victims of the Woolsey Fire of Malibu have yet to receive claims from their insurers. Mostly because of faulty claims due to technicalities in their respective policies. So it is of utmost importance for homeowners to go through every line of paperwork and thereafter, maybe year on year, conduct a policy review with their trusted insurance advisers, and should there be a need, update the contract. One of the fine line prints that were used by insurers to deny total loss claims was the stipulation where the insured may only rebuild on the same location, which in this case were already deemed as fire hazard areas, and where the owners wisely decided to rebuild elsewhere, for safety reasons. As a matter of fact, in September 2018, California had to pass a law banning this practice of insurance companies, which was chalked up as a win for the victims struggling to get back on their feet.
Part of the new law also provides for policy coverage for added rebuilding costs attributed to building code updates, including extended replacement. Extended replacement refers to a benefit that pays for costs over and above what the insurance policy provides. Typically, this addresses inflation due to high demand in a locality such as a case in Malibu’s Woolsey Fire where the need for contractor services and construction materials spiked considerably after the said incident. Previously, one had to secure a “Guaranteed Replacement Cost” policy where all rebuilding cost is paid for, provided that the homeowner complies with requirements indicated in the contract.
Two separate bills that immediately were signed into law following the wake of the tragedy would also provide fire victims with much-needed reprieve. First is the extension of the allowable period for filing a claim from one year to two years; the other one is another extension but this is for the minimum time with which one may collect a claim. This was reconsidered from the original terms of 24 months to 36 months. For the traumatized victims, this would be ample time to collect themselves and set their affairs in order.
There are other changes that didn’t quite make it into law but nonetheless, insurers agreed to a compromise. One such provision pertains to ALE or Additional Living Expenses. This is where the homeowners are reimbursed for alternative dwelling expenditures incurred when victims move into another house that fall into the category of “like” dwelling. This means accommodations that are of equal or comparable living standards. Many insurers have agreed to allow the expense even if such arrangements do not necessarily meet the “like” dwelling description, only to avoid the affected homeowner having to travel hundreds of miles away just to satisfy the definition; in some cases shuttling the distance daily for work, which is unreasonable.
There were also rife discussions on debris removal prior to rebuilding efforts. More often than not, this activity jacks up expenses to the point of exceeding the policy limits. On a community scale, the homeowners discovered that a concerted debris clearing effort may help reduce costs to individual claimants. It is best however to coordinate and seek approval with the involved insurance provider before this is done.
SUMMING IT ALL UP
Life, as they say, is a school of hard knocks. The best lessons are those learned the hard way. The California wildfires in previous years only show how catastrophic these can be to individual lives and the community as a whole. Looking at the flip side of the coin, it is prudent to look at fire prevention and mitigation practices while gearing towards building fire-resistant communities.
Having insurance is good, but having a clear understanding of the terms and conditions that comes with it is still the best. One lesson stands out from victims of home fires, which is to be able to maximize insurance claims and payouts and be able to secure these benefits in a timely manner. Understanding legislation and regulations are also key in achieving these goals and making insurance more “palatable” and relatable, even to the simple-minded. There are countless insurance professionals out there that can help break down the fine print and make it easier to understand. More so, a yearly discussion and review of these terms may help adapt the policy to the times.
It is also good to know that in light of these catastrophes, the government also has stepped up and done its part to level the playing field. Since the California Wildfires of 2017 and 2018, the state of California has taken numerous legislative and regulatory moves in ensuring the following: a) Appropriate insurance rates and availability of choices and options; b) Insurance companies treat their clients fairly and objectively; c) Protect the solvency of insurance providers.
Should you have any need for assistance regarding Home Insurance, please do not hesitate to contact us. We’d love to hear from you and help you out.